MPC measures not sufficient for economic growth – Analysts

By Babajide Komolafe

The decisions of the Monetary Policy Committee (MPC) to reduce the Monetary Policy Rate (MPR) to 11 percent and cut the Cash Reserve Requirement of banks to 20 percent will not automatically translate to economic growth, said economic analysts. Faced with the slow economic growth in the three quarters of the year, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at the end of its meeting on Tuesday decided to relax monetary policy in a bid to boost growth.  Consequently the MPC reduced the MPR from 13.0 percent to 11.0 percent; reduced the Cash Reserve Requirement (CRR) from 25.0 percent to 20.0 percent; and fixed the Asymmetric corridor of +2.0 percent and -7.0 percent around the MPR.

Commenting on this development, Razi Khan of Standard Chartered said, “The easing measures are aimed at boosting Nigeria’s real economy. How successful they are will depend on how much other bottlenecks, currently constraining real-sector activity, can be overcome”. Kunle Ezun of Ecobank Treasury Research team expressed similar views.

He said, “While this effort from the monetary authority to boost growth is commendable, it is not automatic and might require  complementary efforts and strategic policy decision from the fiscal authority in the area of infrastructural renewal and security to transform the economy”.

Similarly, Financial Derivative Company (FDC) in its reaction stated, “Though the new changes made to the policy rate and CRR indicate the apex bank’s concern with the slowing economic growth, the exchange rate and its policy implications is still an issue that the CBN will need to answer. All eyes will now move to the January meeting and the 2016 budget of the FGN to see what the economic direction of Nigeria is likely to be.”

To reduce FG’s debt service burden

According to the FDC, the decision of the MPC will lead to 50 percent reduction in the debt service burden of the federal government. The company noted, “But more importantly is the adjustment of the corridor around the MPR to an asymmetric corridor of +2 percent and -7 percent. What this effectively means is that the CBN will borrow at 4 percent p.a and lend at 13 percent p.a. By this significant move, the CBN will be reducing the FGN debt service burden by about a half. The Federal government debt service burden in 2014 was in excess of N1 trillion.”

N771bn liquidity injection

Meanwhile, Afrinvest Plc in its comment stated that the decision to reduce the CRR to 20 percent will inject N771.4 billion additional liquidity into the interbank market.  Commenting on how the MPC decision will impact interbank liquidity and interest rates, the company stated, “The 200 basis points (bps) cut in MPR and introduction of an asymmetric corridor around the MPR at +200bps and -700bps is the most significant of the policy decisions reached today as this brings the Standing Lending Facility (SLF) and Standing Deposit Facility (SDF) rates to 13.0 percent and 4.0 percent from 15.0 percent and 11.0 percent respectively.

Prior to the MPC decision, there has been a regulatory maximum on the remunerable SDF placement by each bank at N7.5 billion. The MPC’s decision to complement this by a further 5.0 percent cut in CRR will add approximately N771.4 billion  to liquidity level based on October data from the CBN. ”

Afrinvest however noted that the increased liquidity will not immediately translate to increased lending by banks. It stated,” In the short term, we do not expect the ease in monetary policy to immediately translate to increase lending to the real sector, especially given the high risk retail/SME loans segment.

Structural bottlenecks, weak quality of infrastructure and the current slowdown in economic activities constitute high risk to real sector lending, which would require more adjustments by the fiscal authorities to de-risk the sector. However, with the restriction on all cheap income lines, we expect a significant medium term expansion in Credit to the private sector (currently at N19.1tn in October 2015 and up 6.8 percent Y-o-Y) by DMBs. This will necessitate banks to improve on their risk management framework to identify opportunities and earn a relatively higher margin (compared to the cheap rates in the fixed income market) and buoy assets turnover and shareholders’ return.”

Capital flight & Increased Inflation

Analysts at Afrinvest and FDC  believe that the MPC measures could lead to capital flight from Nigeria’s fixed income markets and also increased inflationary pressures. FDC analysts stated, “Already Nigerian Treasury bills are yielding less than 4 percent p.a, much lower than the inflation rate. As interest rates have been reduced, there may be capital flight from the Nigerian fixed income market, especially in light of the anticipated rate hike by the US Fed in December.

The growth in M2, which is -5 percent (annualised), gives some room for increasing money supply without stoking inflation. However, the refund of CRR and the lower MPR will definitely lead to increase in anticipated inflation.”  According to Afrinvest, “The relaxed monetary stance of the MPC after its last meeting for the year, though positive for stimulating short-term economic growth, may not come without negative implications for the economy in the medium term.

With the reduction in interest rate, Nigeria is likely to face increased capital flight consequences in the medium to long term, more so if the Fed raises its benchmark interest rate at its next meeting in December. “Equally, the spike in financial market liquidity resulting from the reduction in CRR to 20.0 percent as well as the expansionary 2016 fiscal year is expected to further trigger inflationary pressure.”